Appellate courts issue significant insurance decisions

2017 IN REVIEW

In 2017, California appellate courts issued several insurance-related decisions. Three are of particular significance.

In Global Modular, Inc. v. Kadena Pacific, Inc., 15 Cal. App. 5th 127 (2017), the court addressed a dispute among a general contractor, its subcontractor and the subcontractor's general liability insurer over water damage to a construction site caused by rain. In doing so, the court addressed three coverage defenses commonly raised by insurers.

First, the court addressed the insurer's argument that an exclusion applicable to the "particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing are performing operations" applied. The court held that "the use of the active, present tense construction 'are performing operations' indicates the exclusion applies only to damage caused during physical construction activities. Had the policy drafters intended the exclusion apply more broadly to damage to any of the insured's work in progress, we would expect the provision to say something along the lines of, 'property damage to that particular part of real property in which your operations are not yet complete' or even 'property damage to your work arising out of your operations.' The drafters use this kind of broad language elsewhere in the policy .... We find it telling [that this] exclusion ... employs a much more narrow construction, restricting the excluded damage to only that particular part on which the insureds are performing operations." Thus, the court emphasized that the verb tense used in a policy can control coverage.

Next, the court addressed the insurer's argument that coverage was precluded because of an exclusion applicable to "[t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The court noted that dictionary definitions of "particular" and "part" "indicate the phrase is intended to be a narrowing element, one that limits the provision's application to a distinct part of a construction project. That the incorrect work must have been performed 'on' that particular part is an additional narrowing element. ... As written ... the exclusion's narrowing language demonstrates it refers to the specific part of the insured's work on which the insured performed faulty workmanship and not, more broadly, to the general area of the construction site affected by the insured's work." Thus, according to the court, the "where" in a policy is as important as the "when."

Finally, the court addressed the insurer's argument that its policy excluded coverage for "faulty workmanship" and that liability insurance is "not meant to insure contractors against the 'business risk' occasioned by their own faulty workmanship." The court rejected this argument, finding that "it is based on [the insurer's] view of the underlying policy of commercial general liability insurance and not on an application of the policy language to the facts of the case." It noted that the "actual text of the CGL policy does not support" the insurer's argument. It found that nothing in the exclusions "indicates they are meant to apply broadly to any damage to the insured's work before completion."

In Stein v. AXIS Insurance Co., 10 Cal. App. 5th 673 (2017), the court addressed an important question under directors and officers liability policies. The policy at issue, like many such policies, contained an exclusion for willful misconduct, with a limitation that the exclusion would apply "only if there has been ... a final adjudication adverse to [the] Insured Person in the underlying action ... establishing that the Insured Person" committed willful misconduct.

The insurer argued that it did not have to provide coverage for the insured because the insured had been indicted by a federal grand jury, found guilty on all counts, and sentenced to prison. However, the insured appealed the judgment, with the 11th U.S. Circuit Court of Appeals affirming the conviction, but vacating the sentence and remanding the matter for resentencing. The insurer argued that the exclusion applied because the federal district court judgment was a final adjudication for policy purposes. It reasoned that under federal law, a trial court judgment is deemed to be a final adjudication until reversed on appeal.

The court rejected this argument. It first explained that "nothing in the policy indicates that the parties intended that the phrase 'final adjudication' carry the same meaning in the exclusion as it carries in federal law. Policy language is construed in the context of the policy as a whole and the circumstances of the case, not by reference to abstract concepts cherry picked from outside factors." The court emphasized that the policy "made no mention of federal law and no distinction between the federal and state court proceedings. That [the] conviction happened to be in federal court was irrelevant to the policy."

The court also reasoned that even under federal law, an adjudication "that is 'final until reversed' is not final for all purposes." It noted that an appellate court judgment is "as much an 'adjudication' as a trial court judgment, with greater finality."

Finally, in State v. Continental Insurance Co., 15 Cal. App. 5th 1017 (2017), the court addressed a number of coverage issues regarding the clean-up of the Stringfellow hazardous waste site. One related to a common "other insurance" provision -- that is, a provision in the policy that states that if the insured had other valid and collectible insurance against loss covered by the policy, then the policy's coverage "shall be excess only, and not primary or contributing." The court held that this clause did not limit the insured's rights against the insurer. As it explained, "other-insurance clauses are intended to apply in contribution actions between insurers, not in coverage litigation between insurer and insured."

The court also addressed the insured's claim for interest against insurer. The insurer argued that various issues rendered liability and damages uncertain. The court rejected the insurer's arguments. It held that "[a] legal dispute concerning the defendant's liability or the proper measure of damages ... does not render damage as unascertainable." It explained, "When the allocation of indemnity among insurers turns on factual issues, damages are uncertain and pretrial interest is unavailable. When it turns exclusively on legal issues, damages are certain and pretrial interest is available."

The court emphasized: "What is critical is not whether the defendant actually knows how much it should pay; rather, it is whether the defendant could have calculated how much it should pay, if it had known how a court would ultimately rule on the legal issues." Therefore, it determined that an interest award was appropriate, stating that "the liability-damages dichotomy is not controlling; rather, what is controlling is the legal-factual dichotomy."